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June 16, 2012

Facebook Grilled By American Regulators Prior To IPO

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In the days following Facebook's February announcement that it would be going public, the company faced a multitude of questions from federal regulators in the U.S., according to information released by the Securities and Exchange Commission (SEC) on Friday.

According to Julianne Pepitone of CNNMoneyTech, the SEC contacted officials at the popular social media website at the end of the month with more than 120 questions covering a variety of issues, including co-founder Mark Zuckerberg and his level of control over the company, user privacy and advertising, falsified or fictitious users, and revenue (particularly from mobile users).

"As part of its filing, Facebook said that it had 425 million mobile users, but was not yet making any money from them, which could negatively affect its business," PCMag reporter Chloe Albanesius wrote on Friday. "Later that month, it announced plans for ads in the mobile newfeed. But by May, Facebook filed an amended S-1 filing with the SEC that said it now had 488 million mobile users, who were still not generating any revenue for the social networking giant."

"Assuming that the trend toward mobile continues and your mobile monetization efforts are unsuccessful, ensure that your disclosure fully addresses the potential consequences to your revenue and financial results rather than just stating that they ´may be negatively affected,´" the SEC said in a February 28 letter to Facebook, according to Bloomberg writer Steven Sloan.

Benjamin Pimentel of MarketWatch said that, in their IPO filings, Facebook repeatedly called their ability to generate revenue from the mobile market "unproven," and the SEC contacted them seeking more information regarding that statement. They also wrote to the company on March 22, asking about the company's mobile presence and asking them to disclose "any material trends" regarding the mobile market -- as well as the overall trends related to their growing number of users and the rate at which they were able to monetize that customer base.

Regarding Zuckerberg, Pepitone reported that he owned approximately 23% of the company's shares, but actually holds "majority control" because he possesses "irrevocable proxy" over the voting power of shares held by other stockholders. As such, he apparently controls voting power over nearly 56% of Facebook's shares, making it a "controlled company" which would mean that the social network qualified for specific rule changes and exemptions.

Pepitone said that the SEC was asking Facebook "to 'more fully explain how the risk of Mr. Zuckerberg's control affects you and the [stockholders].' “¦ Here's one effect: As a controlled company, Facebook isn't required to have a majority of its board members be independent of the company. It also doesn't have to have a compensation committee to review and approve the pay of Facebook's top executives, including Zuckerberg."

The SEC had also asked Facebook for details about Zynga's share of ad revenue, for details about the level of control users had over the information they shared with the social network, the estimated number of the 900 million users who were fraudulent accounts, and more information regarding their advertising department and the sale of virtual goods through the website, according to Albanesius and Pepitone.